Philippines Raises Reserve Ratio, Keeps Key Rate Unchanged

May 8 (Bloomberg) -- The Philippine central bank ordered
lenders to set aside more money as reserves a second time this
year to curb liquidity and price pressure, while holding the
benchmark rate for a 12th meeting.

Bangko Sentral ng Pilipinas raised the reserve requirement
ratio for universal and commercial banks by one percentage point
to 20 percent effective May 30, it said in Manila today, as
predicted by eight of nine economists in a Bloomberg News
survey. It kept the rate it pays lenders for overnight deposits
at a record-low 3.5 percent, as forecast by 19 of 21 economists.

The central bank said inflation risks “lean toward the
upside,” as it raised its forecasts for this year and next,
citing higher prices of food, transport and power. The need for
accommodative policy has waned and the Philippines needs
measures to absorb liquidity and prevent stretched asset
valuation, the International Monetary Fund said in March.

“The upward revision in the inflation views and the fact
that BSP sees upside risks to these forecasts suggest that its
next step may be to touch the policy rate, probably within the
next couple of meetings,” said Euben Paracuelles, a Singapore-based economist at Nomura Holdings Inc. “The central bank will
probably raise the overnight borrowing rate before inflation
gets close to 5 percent.”

The peso rose 0.1 percent before the decision to close at
44.185 per dollar. The benchmark stock index climbed 0.3 percent
and has advanced about 15 percent this year, among the biggest
gainers in Asia, buoyed by the longest stretch of inflows into
Philippine equities since at least 1999.

Forecasts Raised

Consumer prices rose 4.1 percent in April from a year
earlier, quickening from a 3.9 percent gain in March. The
central bank today said drier weather poses risks as it raised
its forecast for 2014 to 4.3 percent from 4.2 percent and its
estimate for 2015 to 3.4 percent from 3.2 percent.

President Benigno Aquino is increasing spending to a record
this year to lure investments and boost expansion to as much as
7.5 percent after a 7.2 percent gain last year. Builder Ayala
Land Inc., brandy maker Emperador Inc. and cement producer
Holcim Philippines Inc. are among companies that reported higher
profits last quarter on rising demand.

Governor Amando Tetangco last month said interest rates may
not be the best tool to curb surging money supply. A strong
economy gave the monetary authority room to raise the reserve
requirement ratio, he said today, adding that the move is to
curb financial-stability risks.

Indonesia earlier held its borrowing costs as predicted in
a Bloomberg survey. Malaysia will also hold its benchmark rate
today, according to analysts.

Stress Test

Bangko Sentral is firming up steps to avert a property
bubble, including requiring banks to undergo a stress test to
gauge their ability to withstand losses in their property
exposure, Deputy Governor Nestor Espenilla said earlier today.

The central bank sees no evidence of stretched property
valuations, with property prices “way below” the levels in
1997-1998, Deputy Governor Diwa Guinigundo said at a briefing
after the rate decision today. The increase in the reserve ratio
will siphon off an estimated 60 billion pesos from the financial
system, Guinigundo said.

It is difficult to characterize the policy bias at this
point, and the monetary authority can consider other prudential
tools if needed, Guinigundo said.

The Philippine central bank last year cut the rate on SDAs
three times and restricted access to the funds as the BSP
shifted toward an interest-rate corridor approach. Money-supply
growth exceeded 30 percent every month in the nine months
through March. The pace is expected to slow to 15 percent to 17
percent by mid-year, Guinigundo reiterated today.

Today’s move “is in line with the central bank’s
reluctance to tweak policy rates that could fuel financial
stability pressures,” Australia and New Zealand Banking Group
Ltd. analysts Eugenia Fabon Victorino and Glenn Maguire said in
a note. “We expect further tightening as the central bank
remains cautious of persistently high growth in domestic
liquidity.”